

[Federal Register: December 6, 2007 (Volume 72, Number 234)]
[Notices]               
[Page 68924-68926]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr06de07-101]                         

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-56871; File No. SR-ISE-2007-87]

 
Self-Regulatory Organizations; International Securities Exchange, 
LLC; Notice of Filing and Order Granting Accelerated Approval of 
Proposed Rule Change Relating to the Criteria for Securities That 
Underlie Options Traded on the Exchange

November 30, 2007.
    Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 
(``Act''),\1\ and Rule 19b-4 thereunder,\2\ notice is hereby given that 
on November 29, 2007, the International Securities Exchange, LLC 
(``ISE'' or ``Exchange'') filed with the Securities and Exchange 
Commission (``Commission'') the proposed rule change as described in 
Items I and II below, which Items have been substantially prepared by 
the Exchange. This order provides notice of the proposed rule change 
and approves the proposed rule change on an accelerated basis.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
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I. Self-Regulatory Organization's Statement of the Terms of Substance 
of the Proposed Rule Change

    The ISE proposes to permit the initial and continued listing and 
trading on the Exchange of options on Index Multiple Exchange Traded 
Fund Shares (``Index Multiple ETFs'') and Index Inverse Exchange Traded 
Fund Shares (``Index Inverse ETFs''). The text of the proposed rule 
change is available at (http://www.ise.com), at the Exchange, and at 

the Commission's Public Reference Room.

II. Self-Regulatory Organization's Statement of the Purpose of, and 
Statutory Basis for, the Proposed Rule Change

    In its filing with the Commission, the Exchange included statements 
concerning the purpose of and basis for the proposed rule change and 
discussed any comments it received on the proposed rule change. The 
text of these statements may be examined at the places specified in 
Item III below. The Exchange has prepared summaries, set forth in 
sections A, B, and C below, of the most significant aspects of such 
statements.

A. Self-Regulatory Organization's Statement of the Purpose of, and the 
Statutory Basis for, the Proposed Rule Change

1. Purpose
    The purpose of the proposed rule change is to amend ISE Rules 502 
and 503 to enable the listing and trading on the Exchange of options on 
Index Multiple ETFs and Index Inverse ETFs. Index Multiple ETFs seek to 
provide investment results, before fees and expenses, that correspond 
to a specified multiple of the percentage performance on a given day of 
a particular foreign or domestic stock index. Index Inverse ETFs seek 
to provide investment results, before fees and expenses, that 
correspond to the inverse (opposite) of the percentage performance on a 
given day of a particular foreign or domestic stock index by a 
specified multiple. Index Multiple ETFs and Index Inverse ETFs differ 
from traditional exchange-traded funds (``ETFs'') in that they do not 
merely correspond to the performance of a given index, but rather 
attempt to match a multiple or inverse of such underlying index 
performance. The ProShares Ultra Funds, which currently trades on the 
American Stock Exchange (``Amex''), is an example of an Index Multiple 
ETF. Amex also currently lists for trading Index Inverse ETFs, namely 
the Short Funds and the UltraShort Funds.\3\
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    \3\ See Securities Exchange Act Release Nos. 52553 (October 3, 
2005), 70 FR 59100 (October 11, 2005) (SR-Amex-2004-62) (approving 
the listing and trading of the Ultra Funds and Short Funds) and 
54040 (June 23, 2006), 71 FR 37629 (June 30, 2006) (SR-Amex-2006-41) 
(approving the listing and trading of the UltraShort Funds). The 
Ultra Funds are expected to gain, on a percentage basis, 
approximately twice (200%) as much as the underlying benchmark index 
and should lose approximately twice (200%) as much as the underlying 
benchmark index when such prices decline. The Short Funds are 
expected to achieve investment results, before fees and expenses, 
that correspond to the inverse or opposite of the daily performance 
(-100%) of an underlying benchmark index. Lastly, the UltraShort 
Funds are expected to achieve investment results, before fees and 
expenses, that correspond to twice the inverse or opposite of the 
daily performance (-200%) of the underlying benchmark index.
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    In order to achieve investment results that provide either a 
positive multiple or inverse of the benchmark index, Index Multiple 
ETFs or Index Inverse ETFs may hold a combination of financial 
instruments, including, among other things, stock index futures 
contracts; options on futures; options on securities and indices; 
equity caps, collars and floors; swap agreements; forward contracts; 
repurchase agreements; and reverse repurchase agreements (the 
``Financial Instruments''). The underlying portfolios of Index Multiple 
ETFs generally will hold at least 85% of their assets in the component 
securities of the underlying relevant benchmark index. The remainder of 
any assets is devoted to Financial Instruments that are intended to 
create the additional needed exposure to such underlying index 
necessary to pursue its investment objective. Normally, 100% of the 
value of the underlying portfolios of Index Inverse ETFs will be 
devoted to Financial Instruments and money market instruments, 
including U.S. government securities and repurchase agreements (the 
``Money Market Instruments'').
    Currently, ISE Rule 502(h) provides securities deemed appropriate 
for options trading shall include shares or other securities (``Fund 
Shares'') \4\ that (i) represent interests in registered investment 
companies (or series thereof) organized as open-end management 
investment companies, unit investment trusts or similar entities that 
are traded on a national securities exchange or through the facilities 
of a national securities association and are defined as an ``NMS 
stock'' under Rule 600 of Regulation NMS, and that hold portfolios of 
securities comprising or otherwise based on or representing investments 
in broad-based indexes or portfolios of securities (or that hold 
securities in one or more other registered investment companies that 
themselves hold such portfolios of securities); or (ii) represent 
interests in a trust that holds a specified non-U.S. currency deposited 
with the trust when aggregated in some specified minimum number may be 
surrendered to the trust by the beneficial owner to receive the 
specified non-U.S. currency and pays the beneficial owner interest and 
other distributions on the deposited non-U.S. currency, if any, 
declared and paid by the trust (``Funds''); or (iii) represent 
commodity pool interests principally engaged, directly or indirectly, 
in holding and/or managing portfolios or baskets of securities, 
commodity futures contracts, options on commodity futures contracts, 
swaps, forward contracts and/

[[Page 68925]]

or options on physical commodities and/or non-U.S. currency 
(``Commodity Pool ETFs'').
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    \4\ ISE also proposes to make technical conforming changes to 
its current ISE Rules 502(h) and 503(h) to those of the Amex. As a 
result, and in the context of this filing, the Exchange refers to 
Fund Shares as Exchange-Traded Fund Shares hereafter.
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    The Exchange proposes to amend ISE Rule 502(h) to expand the type 
of options to include the listing and trading of options based on Index 
Multiple ETFs and Index Inverse ETFs that may hold or invest in any 
combination of securities, Financial Instruments and/or Money Market 
Instruments. Index Multiple ETFs and Index Inverse ETFs will continue 
to otherwise satisfy the listing standards in ISE Rule 502(h). The 
Exchange also proposes to make non-substantive, clarifying changes to 
its Rule 502(h) by conforming the construction of this rule to that of 
the Amex. The Exchange notes that this change is purely aesthetic and 
does not make any substantive changes to the listing standards found in 
ISE Rule 502(h). Accordingly, in addition to certain repositioning of 
existing rule text, the Exchange also proposes to (1) remove the 
reference to a ``national securities association'' in ISE Rule 
502(h)(i), and (2) add the words ``or currencies'' to ISE Rule 
502(h)(ii).
    As set forth in proposed amended ISE Rule 502(h), Index Multiple 
ETFs and Index Inverse ETFs must be traded on a national securities 
exchange and must be an ``NMS stock'' as defined under Rule 600 of 
Regulation NMS. In addition, Index Multiple ETFs and Index Inverse ETFs 
must meet either: (i) The criteria and guidelines under ISE Rules 
502(a) and 502(b); or (ii) be available for creation or redemption each 
business day from or through the issuing trust, investment company, 
commodity pool or other entity in cash or in kind at a price related to 
net asset value, and the issuer is obligated to issue Exchange-Traded 
Fund Shares in a specified aggregate number even if some or all of the 
investment assets and/or cash required to be deposited have not been 
received by the issuer, subject to the condition that the person 
obligated to deposit the investment assets has undertaken to deliver 
them as soon as possible and such undertaking is secured by the 
delivery and maintenance of collateral consisting of cash or cash 
equivalents satisfactory to the issuer of the Exchange-Traded Fund 
Shares fund, all as described in the prospectus.
    The Exchange's current continued listing standards for options on 
Fund Shares will continue to apply.
    The Exchange proposes to amend ISE Rule 503(h) to indicate that the 
index or portfolio may consist of, among other things, securities, 
Financial Instruments and/or Money Market Instruments. In proposing to 
make conforming changes to the Exchange's rules to those of the Amex, 
ISE seeks to amend ISE Rule 503(h) by (1) deleting a reference to 
``national securities association'' and (2) adding the words ``or 
suspended''.
    Under the applicable continued listing criteria in ISE Rule 503(h), 
options on Exchange-Traded Fund Shares may be subject to the suspension 
of opening transactions as follows: (1) Following the initial twelve-
month period beginning upon the commencement of trading of the 
Exchange-Traded Fund Shares, there are fewer than 50 record and/or 
beneficial holders of the Exchange-Traded Fund Shares for 30 or more 
consecutive trading days; (2) the value of the index or portfolio of 
securities or non-U.S. currency, portfolio of commodities including 
commodity futures contracts, options on commodity futures contracts, 
swaps, forward contracts, options on physical commodities, and/or 
Financial Instruments and Money Market Instruments, on which the 
Exchange-Traded Fund Shares are based is no longer calculated or 
available; or (3) such other event occurs or condition exists that in 
the opinion of the Exchange makes further dealing on the Exchange 
inadvisable. Additionally, the Exchange-Traded Fund Shares shall not be 
deemed to meet the requirements for continued approval, and the 
Exchange shall not open for trading any additional series of option 
contracts of the class covering such Index Multiple ETFs or Index 
Inverse ETFs, if the underlying ETFs are halted or suspended from 
trading on their primary market or if the underlying ETFs are delisted 
in accordance with the terms of ISE Rule 503(h) or the value of the 
index or portfolio on which the underlying ETFs are based is no longer 
calculated or available.
    The expansion of the types of investments that may be held by Index 
Multiple ETFs or Index Inverse ETFs under ISE Rule 502(h) will not have 
any effect on the rules pertaining to position and exercise limits \5\ 
or margin.\6\
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    \5\ See ISE Rules 412 and 414.
    \6\ See ISE Rule 1202.
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    This proposal is necessary to enable the Exchange to list and trade 
options on the shares of the Ultra Fund, Short Fund and UltraShort Fund 
of the ProShares Trust.\7\ ISE believes the ability to trade options on 
Index Multiple ETFs and Index Inverse ETFs will provide investors with 
greater risk management tools. The proposed amendment to the Exchange's 
listing criteria for options on Fund Shares is necessary to ensure that 
the Exchange will be able to list options on the Funds of the ProShares 
Trust as well as other Index Multiple ETFs or Index Inverse ETFs that 
may be introduced in the future.
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    \7\ See supra, note 3.
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    The Exchange represents that its existing surveillance procedures 
applicable to trading in options are adequate to properly monitor the 
trading in Index Multiple ETF options and Index Inverse ETF options.
2. Statutory Basis
    The Exchange believes the proposed rule change is consistent with 
Section 6(b) of the Act \8\ in general and furthers the objectives of 
Section 6(b)(5) \9\ in particular in that it is designed to remove 
impediments to and perfect the mechanism of a free and open market and 
a national market system, and, in general, to protect investors and the 
public interest.
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    \8\ 15 U.S.C. 78f(b).
    \9\ 15 U.S.C. 78f(b)(5).
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B. Self-Regulatory Organization's Statement on Burden on Competition

    The proposed rule change does not impose any burden on competition.

C. Self-Regulatory Organization's Statement on Comments on the Proposed 
Rule Change Received From Members, Participants or Others

    No written comments were solicited or received with respect to the 
proposed rule change.

III. Solicitation of Comments

    Interested persons are invited to submit written data, views and 
arguments concerning the foregoing, including whether the proposed rule 
change is consistent with the Act. Comments may be submitted by any of 
the following methods:

Electronic Comments

     Use the Commission's Internet comment form at http://www.sec.gov/rules/sro.shtml.
; or     Send an e-mail to rule-comments@sec.gov. Please include 

File No. SR-ISE-2007-87 on the subject line.

Paper Comments

     Send paper comments in triplicate to Nancy M. Morris, 
Secretary, Securities and Exchange Commission, 100 F Street, NE., 
Washington, DC 20549-1090.

All submissions should refer to File No. SR-ISE-2007-87. This file 
number should be included on the subject line if e-mail is used. To 
help the Commission process and review your

[[Page 68926]]

comments more efficiently, please use only one method. The Commission 
will post all comments on the Commission's Internet Web site at http://www.sec.gov/rules/sro.shtml.
 Copies of the submission, all subsequent 

amendments, all written statements with respect to the proposed rule 
change that are filed with the Commission, and all written 
communications relating to the proposed rule change between the 
Commission and any person, other than those that may be withheld from 
the public in accordance with the provisions of 5 U.S.C. 552, will be 
available for inspection and copying in the Commission's Public 
Reference Room, 100 F Street, NE., Washington, DC 20549, on official 
business days between the hours of 10 a.m. and 3 p.m. Copies of such 
filing also will be available for inspection and copying at the 
principal office of the Exchange. All comments received will be posted 
without change; the Commission does not edit personal identifying 
information from submissions. You should submit only information that 
you wish to make available publicly. All submissions should refer to 
File No. SR-ISE-2007-87 and should be submitted on or before December 
27, 2007.

IV. Commission's Findings and Order Granting Accelerated Approval of 
Proposed Rule Change

    After careful consideration, the Commission finds that the proposed 
rule change is consistent with the requirements of the Act and the 
rules and regulations thereunder applicable to a national securities 
exchange,\10\ and in particular, the requirements of Section 6(b) of 
the Act.\11\ Specifically, the Commission finds that the proposed rule 
change is consistent with Section 6(b)(5) of the Act,\12\ which 
requires, among other things, that the rules of a national securities 
exchange be designed to prevent fraudulent and manipulative acts and 
practices, to promote just and equitable principles of trade, to remove 
impediments to and perfect the mechanism of a free and open market and 
a national market system, and, in general, to protect investors and the 
public interest.
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    \10\ In approving this proposed rule change, the Commission has 
considered the proposed rule's impact on efficiency, competition, 
and capital formation. See 15 U.S.C. 78c(f).
    \11\ 15 U.S.C. 78f(b).
    \12\ 15 U.S.C. 78f(b)(5).
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Surveillance

    The Commission notes that the Exchange has represented that its 
existing surveillance procedures applicable to trading options are 
adequate to properly monitor trading in options on Index Multiple ETFs 
and Index Inverse ETFs. In addition, the Exchange has represented that 
the expansion of the types of investments that may be held by Index 
Multiple ETFs or Index Inverse ETFs under ISE Rule 502(h) will not have 
any effect on the rules pertaining to position and exercise limits \13\ 
or margin.\14\
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    \13\ See ISE Rules 412 and 414.
    \14\ See ISE Rule 1202.
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Listing and Trading Options on Fund Shares

    The Commission notes that, pursuant to the proposed rule change, 
the Exchange represented that the current continuing listing standards 
for options on Exchange-Traded Fund Shares will continue to apply. 
These provisions include requirements regarding initial and continued 
listing standards, suspension of opening transactions, and trading 
halts. Proposed amended ISE Rule 502(h), would require that Index 
Multiple ETFs and Index Inverse ETFs be traded on a national securities 
exchange and must be an ``NMS stock'' as defined under Rule 600 of 
Regulation NMS. \15\
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    \15\ 17 CFR 242.600(b)(47).
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    The Commission believes that this proposal is necessary to enable 
the Exchange to list and trade options on the shares of the Ultra Fund, 
Short Fund and UltraShort Fund of the ProShares Trust. The Commission 
believes that the ability to trade options on the Index Multiple ETFs 
and Index Inverse ETFs will provide investors with additional risk 
management tools. The Commission further believes that the proposed 
amendment to the Exchange's listing criteria for options on Fund Shares 
will ensure that the Exchange will be able to list options on the Funds 
of the ProShares Trust as well as other Index Multiple ETFs and Index 
Inverse ETFs that may be introduced in the future, thereby affording 
investors greater investment choices.
    The Commission finds good cause for approving this proposal before 
the thirtieth day after the publication of notice thereof in the 
Federal Register. The Commission notes that it has recently approved 
substantially similar proposals by other national securities 
exchanges.\16\ This proposed rule change does not raise any new, 
unique, or substantive issues that differ substantially from those 
raised in the prior filings that would preclude the trading of the 
options on Index Multiple ETFs or Index Inverse ETFs on the Exchange. 
Therefore, accelerating approval of this proposal should benefit 
investors by creating, without delay, additional competition in the 
market for these types of options.
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    \16\ See Securities Exchange Act Release Nos. 56650 (October 12, 
2007), 72 FR 59123 (October 18, 2007) (approving SR-Amex-2007-35) 
and 56715 (October 29, 2007), 72 FR 62287 (November 2, 2007) 
(approving SR-CBOE-2007-119 on an accelerated basis).
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V. Conclusion

    It is therefore ordered, pursuant to Section 19(b)(2) of the 
Act,\17\ that the proposed rule change, (SR-ISE-2007-87), is hereby 
approved on an accelerated basis.
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    \17\ 15 U.S.C. 78s(b)(2).

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\18\
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    \18\ 17 CFR 200.30-3(a)(12).
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Florence E. Harmon,
Deputy Secretary.
[FR Doc. E7-23586 Filed 12-5-07; 8:45 am]

BILLING CODE 8011-01-P
